1. PRICE: ARRIVING AT THE FINAL PRICE C H A P T E R F I F T E E N
Irwin/McGraw-Hill

2. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:
Understand how to establish the initial “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches.
Identify the major factors considered in deriving a final list or quoted price from the approximate price level.
(continued)

3. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:
Describe adjustments made to the approximate price level based on geography, discounts and allowances.
Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price.
Describe the principal laws and regulations affecting pricing practices.

4. PP15-1 Steps in Setting Price
Select an
approximate
price level
-Demand-
oriented
approaches
-Cost-Oriented
-Profit-oriented
-Competition-
Identify
pricing
constraints
and objectives
Estimate
demand
and
revenue
Set list or
quoted price
-One price or
flexible prices
-Company,
customer, and
competitive
effects
-Incremental
costs and
revenues
Make special
adjustments to
list or quoted
price
-Discounts
-Allowances
-Geographical
adjustments
Estimate
cost, volume,
and profit
relationships

5. PP15-AA The Gillette Mach 3 Shaving System
Gillette’s world leading market share:
71% in North American and Europe
91% in Latin American
69% in India
New Mach 3 shaving system is priced 35% above their
highly successful Sensor Excel model, as marketing
research indicated that men would be willing to pay
45% more than they were paying for Sensor given the
additional benefits of the Mach 3.

6. PP15–2 Four approaches for selecting an approximate price level
Demand-based
approaches
skimming
penetration
prestige
price lining
odd-even
target
bundle
yield management
Cost-based approaches
standard markup
cost-plus
experience curve
Profit-based approaches
target profit
target return on sales
target return on
investment
Competition-based
approaches
customary
above, at, or below
market
loss leader
© 1994, Richard D. Irwin, Inc. To accompany MARKETING, 4/E by Berkowitz, Kerin, Hartley, and Rudelius.

7. PP15-BB Demand-Oriented Pricing Approaches
Demand-Oriented Approaches include:
skimming pricing
penetration pricing
prestige pricing
price lining
odd-even pricing
target pricing
bundle pricing
yield management pricing

8. PP15–3 Demand curves for two types of demand-based methods
Prestige pricing B
Price lining A
Price PQ
Price P1 B P2 C P3
Quantity
Quantity

9. PP15-CC Concept Check
1. What are the circumstances in pricing
a new product that might support
skimming or penetration pricing?
2. What is odd-even pricing?

10. PP15-DD Cost-Oriented Pricing Approaches
Cost-Oriented Approaches include:
standard markup pricing
cost-plus pricing
experience curve pricing

11. PP15–A Mark-ups for a manufacturer, wholesaler and retailer on
PP15–A Mark-ups for a manufacturer, wholesaler and retailer on a home appliance sold to the consumer for $100
$100 80 60 40 20 10
Price
Manufacturer
Wholesaler
Retailer
Manufacturer selling price = $ 59.93
Manufacturer mark-up = $ 7.76 = 15%
Manufacturer cost = $ 51.77
Wholesaler mark-up = $ = 20%
Wholesaler selling price = $ 71.43
cost = $ 71.43
Retailer mark-up
=$ = 40%
selling price = $ 100
Wholesaler cost = $ 59.53

12. Average cost of Least-Expensive Models Cellular Phone in Service
PP15–B Cellular phone unit sales, average cost and average price: evidence of the experience effect
As Cellular Phone Volume Increases . . .
The Average Cost to Produce Decreases . . .
3,500
’83
’84
’85
’86
’87
’88
’89
’90
’91
’92
’93
’94
’95
2,500
2,000
1,500
1,000
500
Average cost of Least-Expensive Models
’83
’84
’85
’86
’87
’88
’89
’90
’91
’92
’93
’94
’95
3,000
2,500
2,000
1,500
1,000
500
Cellular Phone in Service
Followed by Price Decreases
Dollars
Dollars
’83
’84
’85
’86
’87
’88
’89
’90
’91
’92
’93
’94
’95
3,000
2,500
2,000
1,500
1,000
500
Average Price of Least-Expensive Models
Dollars

13. PP15-EE Profit-Oriented Pricing Approaches
Profit-Oriented Approaches include:
target profit pricing
target return-on-sales pricing
target return-on-investment pricing

14. PP15-4 Results of computer spreadsheet simulation to select price
PP15-4 Results of computer spreadsheet simulation to select price to achieve a target return on investment
Assumptions SIMULATION
or Results Financial Element Year A B C D
Assumptions Price per unit (P) $ $54 $54 $58 $58
Units Sold (Q) , , , ,000
Change in Unit Variable Cost (UVC) % % % % %
Unit variable cost $ $ $ $ $26.40
Total expenses $8, Same Same Same Same
Owner’s salary $18, Same Same Same Same
Investment $20, Same Same Same Same
State and federal taxes % Same Same Same Same
Spreadsheet Net Sales (P x Q) $50, $ 64, $59, $63, $58,000
simulation Less: COGS , , , , ,400
results (Q x UVC)
Gross Margin $28, $ 35, , $ 34, $31,600
Less: total expenses , , , , ,000
Less: owner’s salary , , , , ,000
Net profit before taxes $ 2, $ 9, $6, $8, $5,600
Less: taxes , , , , ,800
Net profit after taxes $ 1, $ 4, , , ,800
Investment $20, $20, $ 20, $20, $20,000
Return on Investment % % % % %

15. PP15-FF Competition-Oriented Pricing Approaches
Competition-Oriented Approaches
include:
customary pricing
above-, at-, or below market pricing
loss leader pricing

16. PP15-GG Concept Check 1. What is standard markup pricing?
2. What profit-based pricing approach
should a manager use if he or she wants to
reflect the percentage of the firm’s
resources used in obtaining the profit?
3. What is the purpose of loss-leader pricing
when used by a retail firm?

17. PP15-HH One-Price versus Flexible-price Policies
One-Price Policy: setting the same price for similar customers who buy the same product and quantities under the same circumstances. An example would be Saturn’s “no hassle-one price” policy for new and used cars.
Flexible-Price Policy: offering the same product and quantities to similar customers but at different prices. Car dealers have traditionally (and still do) used flexible pricing in getting to the final sale price.

18. PP15-5 The Power of Marginal Analysis in real-world decisions
Suppose the owner of a picture framing store is considering buying a series of
magazine ads to reach her up-scale market. The cost of the ads is $1,000, the average
price of a framed picture is $50, and the unit variable cost(materials plus labor) is $30. This is a direct application of marginal analysis that an astute manager uses to
estimate the incremental revenue or incremental number of units that must be
obtained to at least cover the incremental cost. In this example, the number of extra
picture frames that must be sold is obtained as follows:
Incremental number of frames = =
Extra fixed cost
Price - Unit variable cost
$1,000 of advertising
$50 - $30
50 frames =

19. PP15-6 Three special adjustments to list or quoted price
Geographical
adjustments
FOB origin pricing
Delivered pricing
Single zone pricing
Multiple zone pricing
FOB with freight-
allowed pricing
Basing-point pricing
Discounts
Quantity
cumulative
non-cumulative
Trade (functional)
Cash
Allowances
Trade-in
Promotional

20. PP15–7 The Structure of Trade Discounts
Manufacturer’s suggested list Price
$100.00
Retailer’s cost or wholesaler sales price
$ 70.00
Wholesaler cost or jobber sales price
$ 63.00
Jobber cost or manufacturer’s sale price
$ 59.15
(minus) ($ 30.00)
(minus) ($ 7.00)
(minus) ($ 3.15)
Retail discount: 30% of manufacturer’s suggested price
Wholesaler’s discount: 10% of wholesaler’s sales price
Jobber discount: 5% of jobber sales price

21. PP15–C Example of basing-point pricing
Seattle customer pays $130
$30 freight
$10 freight
Chicago customer
pays $110
Los Angeles
customer
pays $120
$20 freight
St. Louis plant is
“basing-point”
$100 base price

22. PP15–8 Pricing practices affected by legal restrictions
Consumer Goods Pricing Act
Sherman Act
Federal Trade Commission Act
Robinson-Patman
Act
Horizontal price fixing
Predatory
pricing
Geographical
pricing
Price
discrimination
Vertical
price fixing
Deceptive
pricing

23. PP15-II Concept Check 1. Why would a seller choose a flexible-price
policy over a one-price policy?
2. If a firm wished to encourage repeat
purchases by a buyer throughout the
year, would a cumulative or
non-cumulative quantity discount be a
better strategy.
3. What pricing practices are covered by
Sherman Act?